In late September, of 2008, while his offices and personal residences were being raided, Tom Petters was staying at the Bellagio Hotel and Casino. The FBI visited his hotel room and notified him of the raids. It’s fair to assume that Petters, well aware that he had broken countless laws over the last 13 years, suspected that his arrest was forthcoming. He immediately called the offices of Senators Norm Coleman and Amy Klobuchar, whose campaigns he’d generously contributed to. Asking for their advice, he was given the same recommendation from both senators: call Doug Kelley. Kelley, a Minneapolis attorney, had done legal work for both Senators Coleman and Klobuchar. Kelley represented Senator Coleman in a case involving alleged financial irregularities. He had also represented Senator Klobuchar’s father in a D.U.I. case. Petters trusted the advice of his political alliances and called Kelley. Two days later, Kelley and Petters met for lunch and discussed his potential legal trouble. Kelley gave all of his time to Petters, sometimes meeting with him multiple times per day. However, Kelley’s loyalties soon shifted, in favor of political and professional cronyism.
Three days after the FBI raids on Petters and PCI, Kelley received a call from a federal prosecutor in the U.S. Attorney’s office. The U.S. Attorney, Frank Magill, had already heard that Kelley would be representing Petters’ companies. However, this was not yet the case. True, Kelley had been meeting with Petters, but no criminal charges had been made against Petters so he hadn’t retained Kelley as his attorney. The federal prosecutor told Kelley that they were fearful that Petters might try to dump or conceal his assets, especially his ownership of Polaroid and Sun Country Airlines. The prosecutor insisted that unless Kelley could assure him that Kelley himself would take control of those assets, the government would seize them all.
Apparently, this call from the U.S. Attorney’s office was alarming to Kelley because he immediately drove to Petters’ home to tell him about it. Kelley told Petters that the government would hold off seizing his companies if he gave up control of them immediately. Kelley was retained as corporate attorney for the Petters Companies. Then, two days later, Petters signed an agreement that Kelley would take over all of Petters’ assets, as the court-appointed manager. The U.S. Attorney and Kelley took this agreement to a federal judge and it was immediately approved. These events immediately sparked concern within the Petters Companies and and among investors associated with Petters.
First, the U.S. Attorney’s office was building a criminal case against Petters; why were they concerned with how a civil court may divvy up Petters’ hundreds of millions of dollars of remaining assets? Second, wasn’t it a conflict of interest for Kelley to both represent the Petters Companies AND hold control over them? Finally, why was Kelley concerned with the government’s threat to seize Petters assets that were not associated with the PCI Ponzi scheme? Polaroid and Sun Country Airlines were independent companies that had nothing to do with the pending criminal charges, right? So then why was Kelley of the opinion that he should take control of these remaining assets before the government could get a hold of them?
Kelley then went to Judge Anne Montgomery, who was in charge of the Petters bankruptcy, and asked her to freeze the Petters assets that were a tied to the PCI Ponzi scheme. Though these assets were already in dispute because numerous creditors had sued Petters in the months leading up to his arrest, Montgomery agreed to freeze the assets. Montgomery’s decision was done “ex-parte”, meaning the creditors were not given a chance to argue against the freezing of assets that they likely were entitled to, as victims of the Ponzi scheme. To ensure that the creditors would not continue to pursue these assets, Montgomery also issued an indefinite “stay on litigation”, meaning the creditors’ suits were blocked and they were not allowed to file any future claims against these assets unless she lifted the stay. Why were Montgomery and Kelley getting in the way of victims recovering at least part of what Petters and PCI had stolen from them?
While all of this was happening, investors in Petters’ legitimate companies, held by PGW and TPI, were becoming concerned that Petters’ legal trouble at PCI could disrupt business at his other companies. Investors had hundreds of millions of dollars invested with PGW, and in the 2005 purchase of Polaroid. Petters was urged by investors to name a receiver for his companies so that the assets could be properly managed. A prominent name given to Petters was a New Jersey management expert named William Procida. After polling many of Petters’ creditors, the consensus was that Procida was the man for the job. Petters appointed Procida as receiver of his companies and an Illinois state court filed the appointment.
Procida immediately went to work to preserve the remaining Petters assets at PGW. He flew to Minnesota to meet with Kelley, in hopes that they could work together. However, it was immediately clear that Kelley had no intention of working with Procida. Kelley told Procida to pack his bags and go back to New Jersey. What happened next is completely confounding: the U.S. Attorney’s office and Judge Anne Montgomery gave Kelley sweeping powers by appointing him as receiver of all of the Petters companies, even the ones that had not been implicated in the Ponzi scheme. Though Procida’s receivership had already been filed, the Illinois State Courts canceled it. Procida went home and Petters’ creditors really began to worry.
Following the approval of his agreement with Petters, to take control of Petters’ companies as the court-appointed receiver, Kelley arranged for Petters to sign over his voting control of all of his companies to his law partner, Steven E. Wolter in an irrevocable proxy.
Kelley, it appeared, was attempting to take total control over the Petters empire. Wasn’t his appointment as receiver a conflict of interest with his prior legal work with Petters? Didn’t anyone make an argument that Kelley had been given too much control over the Petters assets? Absolutely, but their concerns were ignored, and the courts went a step further by also appointing Kelley as the bankruptcy trustee.
To understand why this was a total conflict of interest, consider the Ponzi scheme perpetrated by Bernard Madoff, which was discovered only months after the PCI Ponzi scheme. First, Madoff hired a defense attorney to represent him in his criminal case. Then, the court appointed Irving H. Picard, a man with no affiliation to Madoff, as bankruptcy trustee. The bankruptcy trustee is in charge of recovering and protecting as many of Madoff’s assets as possible so that they can eventually be liquidated and distributed to victims of his scheme. Finally, the court appointed a third man, Lee S. Richards, who was also unaffiliated with Madoff, as the receiver. The receiver is in charge of managing a bankrupt person’s remaining assets and is appointed based on their expertise of the bankrupt entity’s business. This is how Petters’ proceedings should have been conducted: one man to represent Petters, a second man to act as bankruptcy trustee, and a third man to act as receiver. So how did Kelley go from giving legal counsel to Petters and his companies, and acting as manager of the companies, to becoming the receiver, and the bankruptcy trustee? He was affiliated with Petters, which should have made him ineligible for the jobs of receiver or trustee. Further, he had no business experience of any kind, which is a requirement of a receiver. Finally, these positions are meant to be held by two separate people so that they can keep each other in check. Kelley had essentially been handed free reign to do what he wanted with the Petters companies and the results have been disastrous.
Immediately after being appointed receiver and trustee for the Petters companies, Kelley showed his true colors. On October 11, 2008 Kelley put both PCI and PGW into bankruptcy. Remember, though PGW was owned by Tom Petters, it was not involved in the Ponzi scheme. What was Kelley up to?
Kelley, and everyone helping him operate the Petters bankruptcy, are issuing bills for their services. These bills are paid out of Petters’ remaining assets. This immediately makes sense of the freeze on Petters’ assets and the stay of litigation against his creditors that had been suing him prior to his arrest. Kelley and his team of professionals were not going to work for free and, before any victims received payment, they wanted to make sure that they would be compensated. This is all well and good; we can’t expect anyone to work for free. However, though Kelley’s appointments were supposed to put him on the side of the victims, his efforts were suggesting that he was siding with his professional and political alliances. High-priced professionals were brought on to do even the most menial of tasks and the bills poured in. The existing frozen assets were being drained, so Kelley had turned his focus to PGW. The victims, it seems, were on their own.
As Kelley’s team of professionals submitted their bills, the staggering price tag of the Petters bankruptcy helped to illuminate Kelley’s motivation for placing PGW into bankruptcy. Kelley was supposed to be protecting the companies held by PGW, right? Wasn’t that his role, as the court appointed trustee? In a word, yes. However, protecting PGW from the PCI bankruptcy would mean that there would be fewer assets for Kelley and his team to submit bills against. PCI was penniless. Tom Petters had personal assets, but they were largely in PGW and TPI, which were legitimate companies. Kelley’s goal became to link PGW to PCI so that his team of professionals could continue submitting their outrageous bills. When PGW went on trial for its connection to PCI, Kelley hired his jogging buddy, Kevin Short, as criminal council. Short filed no motions on behalf of PGW and, in total put only a few hours into a case that determined the fate of a multibillion dollar empire. In the end, Kelley, as acting manager of all Petters companies, plead PGW guilty of charges that tied them to PCI. Kelley’s plea opened PGW assets up to his bills.
Months after placing PGW into bankruptcy, Kelley turned his focus to Petters’ most valuable remaining asset: Polaroid. With the help of Polaroid CEO Mary Jeffries, Kelley first placed the company in bankruptcy and then sold it in a fire sale. Polaroid, which Petters had purchased in 2005 for $426 million dollars, was maintained to be worth somewhere in the range of $800 million to $2 billion dollars in early 2008. These figures are amazing to consider, when compared to the price that Kelley and Jeffries auctioned Polaroid for in early 2009: $88 million dollars.
With the dismantling of PGW and its remaining assets, creditors who had never invested in the PCI Ponzi scheme were also becoming victims. However, this time it was Doug Kelley running the scams. Kelley and his professionals have billed almost $50 million dollars in fees, as of June 2011, and continue dismantling the Petters empire to fund their feeding-frenzy.
Most victims of the Petters fraud are yet to see any repayment… and they’re unlikely to see restitution anytime soon. When Kelley and his professionals are done submitting their bills against the Petters assets, then it’s the United States Government’s turn to take a piece of the pie.
In an effort to retain some level of restitution for their losses, victims began citing the Mandatory Victims Restitution Act of 1996. Under this statute, the criminal judge who tried PCI, PGW, and Tom Petters was supposed to award restitution to each of the effected victims as part of his sentencing so that victims didn’t have to sue Petters directly. These restitution judgments are enforceable for 20 years. Even if payment of these judgments is not immediately available, as Petters’ assets are liquidated then restitution payments would be made. However, Judge Kyle ruled that the MRVA statute, although mandatory as the name would plainly suggest, was too complex to administer, and that victims should seek restitution by other means.
One of the major victims in this case, filed an appeal to Judge Kyle’s decision, with the 8th Circuit Court of Appeals. The appeal argued that Kyle’s judgment nullified the law as stated in MVRA. Kyle’s judgment stated that victims had other means of recovering their assets. However, this statement directly opposed the purpose of the MVRA: victims have always had other means of attempting to recover their losses, but the MVRA was created so that they would no longer be forced to pursue those means. The 8th Circuit Court of Appeals upheld Kyle’s decision without ever requiring the government to respond to the merit of the claims that victims’ rights were being violated. The Eighth Circuit also defied the requirements of the Crime Victims Rights Act, that if a court of appeals denies a victim relief, it must file a written opinion explaining its reasoning, which they did not file. It is amazing how those that administer the law to others, can have such a careless regard for following it themselves.
In December, of 2010, another petition was filed by Petters victims, with the U.S. Supreme Court. The appeal asked for a review of the Minnesota District Court and 8th Circuit Court of Appeals decision to deny judgments of restitution to Petters’ victims. In June, of 2011, the U.S. Supreme Court chose arbitrarily not to hear that appeal. So where does that leave the victims?
When Doug Kelley and his team of professionals are finished feeding off the remaining assets of the Petters empire, whatever remains will now be forfeited to the federal government. From these remaining assets, the government will compensate themselves for the time that they have put into the Petters case. If any funds remain, at this point, victims will then be allowed to ask the federal government for a piece of this remainder, through the DOJ remissions program. The chief of the Asset Forfeiture and Money Laundering Division of the DOJ (AFMLS) has already stated that they intend to distribute “net proceeds” to “qualified victims”. This, of course, is a completely discretionary remedy and no guarantees of payment exist.
Doug Kelly, his team of professionals, and the US government, continue to enrich themselves on the remains of the Petters empire. What will be left, if anything, for the people who were defrauded in this scam? They have collectively lost Billions, and now must wait to see what is left of the carcass, after the vultures have had their fill.
